A consultancy or software company might issue four invoices a month, so the bookkeeping is light. The harder part comes from the fact that your clients, your tools and often you yourself are in other countries.
Reverse charge, in both directions
Almost every tool you use is bought from a supplier outside Estonia: cloud hosting, design software, CI (continuous integration) services, analytics and ad platforms. Where the place of supply shifts to Estonia, your company accounts for the VAT itself.
It declares the VAT as output tax and reclaims the same amount as input tax, where it has full deduction rights. In plain terms, the VAT appears on both sides of your own return and usually cancels out.
This item is easy to miss. It usually nets to zero in cash, so it feels unimportant. The Tax Board still notices when the numbers do not match.
On the sales side, services to a business customer in another EU member state are generally reverse charged to them. You report them on the VD report, the summary of sales to EU business customers, and verify their VAT number at the time of supply.
Contractors abroad
Bringing in a developer in Poland, a designer in Georgia or a project manager in Spain is normal in this sector. Each one raises the same three questions.
Is this person a contractor or an employee in substance? Does the payment create a withholding obligation, meaning tax you must deduct before paying? And does the activity create a permanent establishment in that country, which is a taxable presence there?
One contractor abroad is rarely a problem. A team of five working only for you, on your systems and to your schedule, is a different matter. It is better to look at it before the fifth one starts.
Where you are, and where the company is
If you run the company from another country, that country may argue the company is effectively managed there and so is tax resident there. For a one-person consultancy this is the most important question on this page. The answer depends on the facts, not on where the company is registered.
Keep a record of where board decisions are taken. Also check whether your country of residence has controlled foreign company (CFC) rules. These rules can tax undistributed Estonian profit in your hands, whatever deferral Estonia offers.
Taking money out
With high margins and low costs, the question soon becomes how to take profit out. Dividends are taxed at 22/78 of the net amount, with no social tax. Salary and board fees carry income tax and 33% social tax, but they build pension entitlement and health insurance cover.
The efficient answer usually mixes the two. Where the line sits depends on your country of residence, not only on Estonian arithmetic.
The expenses people get wrong
- Home office and equipment used privately as well as for work: partly deductible at best, and a fringe benefit question at worst.
- Conference travel that includes personal days: the private part is not a business expense.
- Software bought in your own name rather than the company's: not deductible without a proper invoice to the company.
- Entertainment and client meals: deduction is restricted, and the excess is taxed as a distribution.
What we set up for consultancies
- Reverse charge applied correctly to every foreign supplier invoice.
- VAT registration timed around your client mix, not only the threshold.
- A written position on permanent establishment and residence before anyone questions it.
- A salary and dividend split calculated for your actual country of residence.
- Contractor agreements reviewed against reclassification risk.
Frequently asked questions
Do I charge VAT to a client in another EU country?
For services to a VAT-registered business in another member state, the supply is generally reverse charged to the customer. You report it on the VD report and must verify their VAT number at the time of supply. Sales to consumers follow different rules.
Do I need to account for VAT on foreign software subscriptions?
Usually yes. Where the place of supply shifts to Estonia, your company declares the VAT as output tax and reclaims the same amount as input tax if it has full deduction rights. It is easy to leave out because it usually nets to zero, so check that it is on the return.
Is a small salary enough, with the rest as dividends?
It depends on your country of residence and on whether you need Estonian health insurance and pension accrual. Dividends carry no social tax but build no entitlement, so the split should be calculated rather than copied.
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